Rolls-Royce shares could recover on three technological breakthroughs

Rolls-Royce (LON: RR) share price is down 76% since its August 2018 high, as the covid-19 pandemic wiped out demand for its aircraft engine manufacturing and servicing.

And as the cost-of-living crisis escalates amid decades-high inflation, rising interest rates, and an increasingly protracted war in Ukraine, IAG and easyJet's predicted summer travel revival looks increasingly up in the air.

Until the sector recovers, Rolls-Royce shares are likely to stay depressed. And worryingly, with net debt over £5 billion, continued interest rate rises could soon become a problem.

However, the company’s £2 billion disposals program is on track, its cost-cuttings program completed a year early, and it returned to profitability in 2021 with a small £124 million profit.

And after spending £1.2 billion last year on Research and Design, the ‘jewel in the crown’ of the UK’s engineering industry has made three breakthroughs that could eventually see it soar.

Rolls-Royce share price: small modular reactors

Rolls-Royce’s cutting-edge designs for small modular reactors (SMRs) are for nuclear power plants the size of two football pitches which can power around 500,000 homes each. And because they’re factory-built, they’re significantly cheaper and faster to build than traditional reactors.

Business Secretary Kwasi Kwarteng has said he’s ‘proud to back Rolls' plan with an initial £210m to develop their design.’ And the company has also received a further £290 million from the Qatar Investment Authority, Perenco, and Exelon Generation.

Moreover, PM Boris Johnson met with the nuclear giants this week to discuss accelerating UK energy security, as the UK cuts off Russian imports at the end of this year. SMR CEO Tom Samson said he ‘was delighted to speak with the Prime Minister about the potential for Rolls-Royce SMR Ltd - the UK’s domestic nuclear technology champion.’

And after talks, Johnson viewed a model of the prospective design, with Samson saying Rolls-Royce is now poised to begin the generic design assessment process. ‘We're ready to work with governments and other parties who are ready to start removing barriers to deploy this technology much faster,’ he said.

Kwarteng has called the announcement a ‘significant step in bringing SMRs into existence.’ The new reactors could start supplying power as soon as 2030.

Flying into the record books

Rolls-Royce’s all-electric plane, the ‘Spirit of Innovation,’ set two new world records in November, hitting a top speed of 555.9 km/h over 3 km, and an average speed of 532.1km/h over 15 km. Both have now been verified by the World Air Sports Federation.
Moreover, previous records weren’t just broken; they were obliterated. Spirit’s 3km record broke the existing record by 213.04km/h, and the 15km record was 292.8 km/h faster.

A third record attempt for the fastest climb to 3,000m is still undergoing verification, but the 202 second time recorded beats the previous best by 60 seconds. And after clocking a max speed of 623km/h during the tests, Rolls-Royce believes the new aircraft is ‘the world’s fastest all-electric vehicle.

Outgoing CEO Warren East thinks ‘this is another milestone that will help make ‘jet zero’ a reality and supports our ambitions to deliver the technology breakthroughs.’

And Kwarteng has called the plane ‘revolutionary,’ believing it ‘proof of the UK’s enviable credentials when it comes to innovation…the government is proud to back projects like this.’

Rolls-Royce’s UltraFan program represents another technological leap forward. The ‘world-leading power gearbox’ was dispatched earlier this month from the company’s factory in Germany to the UK where its engine demonstrator (UF001) is being assembled.

The gearbox has already set a world aerospace power record, offering ‘a step change in gas turbine sustainability, saving 25% fuel compared with the first generation of Rolls-Royce Trent engines.’ And the company says that ‘on test it has delivered 87,000 horsepower or 64 megawatts – enough to power a medium-sized city.’

Moreover, when the engine demonstrator is first tested it will only use sustainable aviation fuel, which is more expensive than the traditional alternative. However, the increased efficiency means it could become cost-effective for commercial operators.

President of Rolls-Royce Civil Aerospace Chris Cholerton argues that the company is ‘creating better, more efficient gas turbines which will be an essential part of air travel for decades to come.’

Rolls-Royce shares are trading at historical lows. But with strong political backing for its technological developments and a wider return to international travel in the offing, it could be recovering soon.

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